Event

Parliamentary elections will take place on 7 June. While the ruling Justice and Development Party (AKP) is likely to be re-elected as President Erdogan and his ‘former’ AKP are credited for bringing Turkey unprecedented political stability and for improving the living standards of the working and lower middle classes, the main question concerns the number of seats to be won by the AKP.

Impact on country risk

The presidential function is highly representative in Turkey. Indeed, until now, Mr Erdogan’s attempts to change the constitution in order to transfer executive power from the Prime Ministry to the Presidency have failed as his party lacks the needed two-third majority and therefore has to reach a compromise with the opposition parties. However, the opposition has so far refused to change the constitution out of fear that the authoritarian tendencies of President Erdogan would increase. This could change if the AKP wins a two-third majority at the forthcoming legislative elections. On the economic side, one of the main tasks of the new government would be to restore policy credibility which is currently under pressure due, in part, to political interference with the central bank’s monetary policy. Even if Turkey’s current account deficit has decreased recently thanks to lower oil prices, its large reliance on short-term capital flows remains its Achilles’ heel. This leaves the currency highly vulnerable to changing investors’ confidence (cf. graph). Credendo Group’s political risk classifications are expected to remain stable as they already take into account the large reliance on volatile short-term capital flows and the risk of spill-over effects from the war in Syria and Iraq and the fragile ongoing peace process with the Kurds. On the positive side, Turkey’s economic fundamentals are strong: exports are well diversified, public finances are solid and the external debt burden is moderate. The banking sector is well regulated and capitalised although heavily reliant on short-term funding.

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Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com